The European union has established the EU emission trading scheme (ETS) as its key climate policy instrument to combat climate change. 

The EU ETS is one of the cornerstone of the European climate policy and could be a cost-effective way to reduce carbon emissions, if well implemented. The EU fertilizer industry is subject to a carbon cost via this system. The European industry is almost unique, globally, in facing this cost. Therefore, ensuring a level playing field for fertilizer production, energy and carbon costs is our priority. 

The system works on the “cap and trade” principle. This means that there is a “cap” or limit, on the total amount of certain GHG that can be emitted by the industry and the EU is gradually decreasing this limit. Within the cap, companies receive or buy emission allowances which they can trade with one another according to their needs. 

Exposure to carbon leakage

Lack of level playing field will affect the industry in multiple ways, exposing it to the risk of carbon leakage whereby industries move production from high to lower-regulated regions. If the asymmetric carbon prices put the domestic producers at such a competitive disadvantage that they will lose market share to foreign competitors – or re-locate their entire production facilities abroad – this will reduce the overall effectiveness of the climate policy, as global emissions are not reduced but merely shifted around.

Carbon leakage is a major concern for the EU Commission and the industries affected. The distribution of free allowances to sensitive sectors and border tax adjustment are two practices that aim to minimise the risks. The EU commission has opted for the distribution of free allowances under strict benchmarks. Under the EU Emissions Trading Scheme, an industry exposed to risk of carbon leakage is entitled to free COallowances up to a benchmark based on the average emissions of the best 10% of the industry’s installations.

The European Fertilizer industry has heavily invested in its production processes and has achieved GHG emission reduction of more than 40% since 2005. Continued industry investment means that European mineral fertilizer producers have the lowest carbon footprint of the worldwide industry. Their ammonia plants are the most-energy efficient and the most of their nitric acid facilities are fitted with modern emissions abatement technologies to limit their nitrous oxide (NO) emissions.

Nitrogen fertilizers at high risk of carbon leakage

When considering the Commission’s two traditional criteria for assessing carbon leakage risks, emission intensity and trade intensity, nitrogen fertilizer are among the industries at the absolutely highest risk.

Challenges for the European Fertilizer Sector

The fertilizer Industry supports ETS as a market based mechanism. However, carbon allowances prices of EU ETS have reached sky-rocketing levels in the recent months (€29/t CO2 in August 2019), which makes it extremely difficult for the European industry to remain competitive on a global market.

Ensuring a level playing field for fertilizer production, energy and carbon costs must remain a main priority for European institutions. Only then will the European fertilizer industry be in a position to evolve in the direction set out in the EU’s long-term decarbonisation vision.

Carbon prices and the European Fertilizer Industry  

The fertilizer industry releases GHG from ammonia production (CO2) and production of nitric acid (NO). CO is emitted in the production of ammonia during the Haber-Bosch process where nitrogen from the air is mixed with hydrogen from natural gas, at high temperature and pressure in the Haber-Bosch process. CO2 emissions are also emitted when ammonia is then mixed with liquid carbon to produce Urea fertilizers. Ammonia can be also mixed with nitric acid to produce nitrate fertilizers such as ammonium nitrate (AN). In this process N2O is produced as a by-product. GHG emissions are an unavoidable by-product in the production of mineral fertilizers. Furthermore, CO2 emissions are emitted from the necessary energy in the ammonia production with is typically produced on site with natural gas.

As a result, modern fertilizer ammonia plants are now close to theoretical minimum in terms of energy consumption, making further improvements very challenging and costlier and raising challenges of global competitiveness.